While both can be attractive options for parking your savings,and money market funds offer different advantages. Money market accounts offer set interest rates on your savings in a or . Meanwhile, a money market fund bundles relatively liquid investments like cash, treasury bills and for a low-risk return.
Money market account: Pros and cons
Money market accounts may serve you well if your goals align with its advantages.
- Flexible linked accounts: You can link your money market account with your or , as well as a . Some money market accounts can be linked to credit and investment accounts.
- Competitive rates: Many money market accounts offer higher interest rates than other savings options. However, may offer even higher rates.
- Safety: Money market accounts are insured by the FDIC up to $250,000, so you won’t lose your money if the bank goes bankrupt.
- Access: Money market accounts are more liquid than certificates of deposit, but more restricted than money market funds.
- Minimum balance requirements: Many money market accounts require a minimum balance to earn interest, and that balance can be as high as $500. While there is no cost to hold a money market account although some financial institutions impose monthly maintenance fees if the minimum balance is not maintained.
- Lower interest rates: Interest rates on money market accounts are lower than other savings options, including money market funds.
Money market fund: Pros and cons
Similarly, money market funds will only be suitable if the pros outweigh the cons for your situation.
- Low risk to principal: Money market funds invest in very low-risk instruments, like cash, cash equivalents and debt-backed securities.
- Liquidity: Unlike money market accounts, money market funds don’t restrict your withdrawals.
- Competitive rates: Money market funds typically offer higher interest rates than money market accounts, though they may deliver a lower return than riskier investments.
- Funds aren’t insured: Money in a money market fund is not protected by the FDIC. It is considered an investment, which is inherently riskier than saving your money in a money market account.
- Fees: Potential fees can reduce returns on your investment.
Make sure you know the specific terms of an account before applying.
Similarities between money market funds and money market accounts
As their names would suggest, there are a few commonalities between money market funds and money market accounts.
While both are low-risk places to park your money, they both come with opportunity cost. It’s possible that you’d earn better returns in riskier investments, like common stock or index funds. And because of their relatively low return rates, both money market accounts and money market funds may not sufficiently protect your investment in a high-inflation environment.
Any returns you do earn may be subject to tax, as well. You’ll have to report any interest or capital gains to the IRS.
The bottom line
Money market accounts and money market funds both offer safety, liquidity and moderate yields which will vary depending on the account or fund. It is important to research and compare rates to find the best option, though you should also consider fees, account minimums and customer service.
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